Title: Euro holds near 2-week high, awaits ECB and Nordstream clarity

Jul 20, 2022 05:16AM ET

By: AnalysisWatch

The euro held near a two-week high against the dollar on Wednesday on expectations of a bigger ECB rate hike this week than previously expected and a Reuters report that a key Russian gas pipeline will be reopened on time after maintenance.

Both events the European Central Bank meeting and the reopening of the Nord Stream 1 pipeline after a 10-day shutdown—are due on Thursday, keeping markets on edge.

But the euro benefited from news that the ECB is considering a 50 basis-point rate hike, having earlier hiked by 25 basis points.

Tuesday's report, cited by two sources, helped the euro post its strongest daily gain in a month. On Wednesday, the currency rose 0.5 percent to $1.02730, the highest since early June, before falling to those levels.

It also gained 0.25 percent against the pound, reaching 85.4 pence.

Later on Wednesday, however, the European Union will unveil detailed plans for emergency energy measures, reinforcing fears that the Eurozone economy is heading for a recession triggered by the energy crisis.

Risks from that event have boosted the eurodollar's short-term implied volatility-a gauge of expected fluctuations-to 14%. On Tuesday, it hit a March 2020 high of more than 14.6%.

The possibility of a more hawkish ECB, along with expectations of aggressive policy tightening from several other countries, is putting pressure on the dollar, which is now more than 2.5 points lower than the 20-year high it reached last week.

Against the basket of major currencies in the dollar index, the greenback was unchanged on the day at around 106.6.

However, China defied the hawkish central bank picture by keeping benchmark lending rates steady. That led to the offshore yuan falling 0.2 percent to 6.76 per dollar.

As for the euro, many warn that a 50 bp rate hike may not support it much longer, noting moves of 75 and even 100 bp in other developed economies.